The ink wasn’t even dry on Monday’s article when a strong day for the Loonie broke the Canola chart through support into dangerously bearish ground. Each time a market approaches a level like this there is a decision that needs to be made, causing headlines of the day to look like they have artificially heavy weight on the market. Such was the case yesterday. I feared that Bearish USDA Soybean data might cause this, but the data and reaction in the Soybean futures was negligible. Even though CAD closed the day with only small gains, early on it was up over half a cent vs the Green Back. That was enough to get Canola into the self fulfilling Bearish chart technical signal. We gained a little bit back today on a weak Loonie day, but are still just outside the box. If we see CAD weakness enough to get us back into the box (above $464) we can silence the alarms. If we don’t get above 464 by the end of the week then the weekly chart becomes just as vulnerable and brings in possibility of creating a new lower band.

Source: barcharts.com

Source: barcharts.com

Am I worried? Well…….yes. Only a fool wouldn’t worry about risk of prices falling when he isn’t sold out. HOWEVER, I have been studying the Canola Supply and Demand table since the combines pulled out of the fields and see something there that offsets my worry, and actually gives me optimism with a hint of excitement creeping in. I drew the conclusion then that 2015/16 Demand had enough upside to bring balance to neutral at current prices (10.25-10.75 net to farmer), but that price would not motivate required acres in 2016 to meet demand 12-18 months out through the 2016/17 crop year. If true this could create upside potential either to buy acres pre seeding, or on weather concerns after seeding if acres don’t get bought. Either way a spike was possible in the future.

The first curve ball to my thesis was SatsCan surprising me with a 38bpa yield on Dec 4 when I felt 35 was reasonable. No worries though as the dip in futures that would be caused would motivate additional Demand and the Ending Stocks outcome could be left unchanged. Then on the Monday immediately after the StatsCan (report was released on Friday) the Loonie breached technical support and took a Bearish leg down from 0.74 to 0.68US. That is 8% support or $37.20mt of downside in Canola hidden from the farmer by Foreign exchange. I was starting to feel my prediction slip away around the 20th of January, Canola was one bad day for the Loonie away from escaping the box to the high side. If this had occurred I would of rescinded my strategy and sold into the resulting strength (buy acres scenario). That break didn’t happen, the box remained intact. At that moment I was starting to consider flat to slightly higher acres, but could we get 21 million? That has been my concern all along, over 21 is trouble, under has potential. Then came the next swing in the Canadian dollar, this time a reversal to short term Bullish that began Jan 20, and I noted on Jan 27. That rebound in CAD drug Canola right back to the bottom of the box and now threatens to break out to the downside. Although the volatility has been relatively low, the ride has been interesting for Canola, particularly for those who have waited to sell along with me. I warned you before Dec StatsCan that it would take some resolve to see this through, and we are not home yet.

Canola Feb 10 2014-2015 DLN 2015-2016 DLN 2016 Estimates
Seeded Acres ‘000 20774.6 20094.7 20355.0
Harvested Acres ‘000 20618.1 19973.9 20150.0
Yield (bu/ac) 35.1 38.0 35.0
Production (‘000 MT) 16410.1 17214.2 15995.0
Total beginning stocks (‘000 MT) 3008.0 2321.7 1860.9
Imports (‘000 MT) 65.0 75.0 94.2
Total supplies (‘000 MT) 19483.1 19610.9 17950.1
Total domestic use (‘000 MT) 8030.4 8250.0 7750.0
Total exports (‘000 MT) 9131.0 9500.0 8625.0
Total demand (‘000 MT) 17161.4 17750.0 16375.0
Total ending stocks (‘000 MT) 2321.7 1860.9 1575.1
Source: DLN AgVentures and StatsCan

After all of this I am sticking to my thesis. Exports and Crush have responded in kind. Seeded acre outlooks so far have been on both sides of my 20.355 million, and a dip in prices now would solidify that number or possibly even bring it down a little. While others might sell this technical signal I am inclined to wait it out. If the technical Bears drag Futures down and we end up with sub $440 on the day StatsCan seeded acre outlook is released and we see sub 20 million acres I will be prepared to buy Call Options and position myself for a weather rally with real potential in May-July this year. Smart money might have come around to my thinking by then too and a potential last minute buy acres rally could happen as soon as April.

Before we get too far ahead of ourselves though let’s focus on the issue at hand. The Canadian Dollar and US Dollar Index are the most important factors at the moment. If they remain features, their moves will have a big impact in the future of Canola prices. Both look to have shifted to a sideways pattern to me. I will be watching these like a hawk (and not just because I will be spending US Dollars for about 10 days later this month!).

Source: barcharts.com

Source: barcharts.com

Source: barcharts.com

Source: barcharts.com